Regional Trade Agreements

TLDR

Regional trade agreements have become the dominant form of trade liberalization in the past 15 years, raising concerns about trade diversion, stalling external liberalization, and undermining multilateralism, though theoretical arguments both support and challenge these worries. The article aims to examine underexplored aspects of regionalism that are essential for understanding its causes and consequences. The authors conduct a comprehensive review of theoretical and empirical studies on regionalism. Empirical evidence shows that trade diversion and stalling of external liberalization have not materialized, while the impact on multilateralism remains untested.

Abstract

This article reviews the theoretical and the empirical literature on regionalism. The formation of regional trade agreements has been, by far, the most popular form of reciprocal trade liberalization in the past 15 years. The discriminatory character of these agreements has raised three main concerns: that trade diversion would be rampant, because special interest groups would induce governments to form the most distortionary agreements; that broader external trade liberalization would stall or reverse; and that multilateralism could be undermined. Theoretically, all these concerns are legitimate, although there are also several theoretical arguments that oppose them. Empirically, neither widespread trade diversion nor stalled external liberalization has materialized, whereas the undermining of multilateralism has not been properly tested. There are also several aspects of regionalism that have received too little attention from researchers, but which are central to understanding its causes and consequences.